ECB debates shifting from bonds to interest rate increases
European Central Bank (ECB) policymakers are shifting their debate to the expected path of interest rates as even some of its most dovish rate-setters accept that lucrative bond buys should end this year, sources close to the discussion said.
Policymakers are comfortable with market forecasts, including for a rate hike by mid-2019, and the debate is increasingly about the steepness of the rate path thereafter, as some want future expectations contained given the slow rebound in inflation, five sources with direct knowledge of the discussion told Reuters.
After more than three years of bond buying totalling nearly €2.5trn, ECB policymakers are now debating how to phase out their unconventional tools and normalise policy in a time of robust growth but weak inflation.
"The only point in extending the programme would be to push out rate hike expectations and anchor the yield curve," one of the sources said.
"But that can be done with other tools, like a more precise forward guidance or more long-term refinancing operations."
The ECB declined to comment and the sources said that no decision has been taken on the future of the bond-buying programme.
The central bank's bond-purchasing scheme, already extended several times, is now due to expire at the end of September, and ECB staff projections assume that they would be wound down over three months thereafter.
"I haven't seen a serious case for another extension," a second source said.
"But we need to carefully manage rate expectations, especially given the trade and fx risk."
Worried about a potential trade war with the United States and increased volatility in foreign exchange markets, the sources said that the key decision on bond buys beyond September is likely to be taken relatively late, such as in June or July.
While the trade tariffs announced by the United States have a relatively small impact on growth, they foreshadow retaliation with potentially greater ramifications, the sources added. (Reuters)